Shareholders use two-strikes rule judiciously

No less than 30 listed companies have received their first “strike" on pay this year, in the wake of the government’s two-strikes rule which empowers shareholders to spill an entire board.

However, only seven of the boards which incurred their first strike were top 200 companies and only 13 were top 300 companies, according to analysis by The Australian Financial Review.

The result reveals that the level of protest by shareholders this year is actually about the same or even lower than in previous years.

Experts claim that the focus on the two-strikes rule has given the appearance of a revolt by investors over pay this year. However, the reality is that shareholders are voting at about the same rate as usual with just over a week of meetings remaining for the year.

“The numbers are actually down on the worst year in 2008 when 15 pay resolutions were withdrawn or defeated [more than 50 per cent] for top-300 companies," head of Ownership Matters, Dean Paatsch, says.

“What the two-strikes rule has succeeded in doing is lowering the outrage constraint but increasing the media interest. We haven’t seen any impact really on lowering salaries, that will take years to play out," Paatsch says.

A recent survey of 1000 investors for the Global Proxy-Melbourne Institute Shareholder Confidence Index shows that just 11.9 per cent believe the new two-strikes rule is working whereas 26.3 per cent of investors say that it is not and 29 per cent say that it is too early to tell.

Paatsch expects shareholders to use the new rule judiciously again next year because investors in companies which have received a strike are still having their directors re-elected to the board with over 90 per cent support. “Something extraordinary would have to happen between now and next year to believe that institutional shareholders would be tossing out directors as a result of receiving a second strike," he says, “But there has certainly been a lot more engagement and focus by directors than in the past and that can’t be a bad thing."

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The previous three years have seen the largest protest votes over pay since the non-binding vote on remuneration reports was introduced by the Howard government in 2005. The number of top 200 companies which would have incurred a strike over the past two years has ranged between 18 and 21 (which includes the full calendar year of annual general meetings), according to analysis by JPMorgan.

This year the top-200 companies to receive a strike have been Crown, Pacific Brands, GUD, Cabcharge, BlueScope Steel, UGL and Perpetual with Crown and Pacific Brands topping the list for the largest protest votes. News Corp also received a protest vote of 35 per cent but will not incur a strike because it is domiciled overseas.

If these companies receive a protest vote of 25 per cent or more again next year, they will be forced to hold a further vote on whether the directors should be re-elected. This requires a simple majority.

The final vote (introduced as a safeguard to the two-strikes rule) explains why James Packer at
Crown
says he will simply use his 46 per cent stake to prevent the board ever being spilled.

Michael Robinson, director of pay experts Guerdon Associates, also believes a major factor in this year’s votes have been changes which means directors and related parties can no longer vote their own shares.

That change has been a major factor behind companies including Crown, Pacific Brands and Globe incurring their first “strike".

“The shareholders who are now voting are all at arm’s length so it is actually a much clearer indication of the mood of the independent investors," he says.

Another factor has been that the level of voting by shareholders at the AGM has soared from only around a third five years ago to more than 70 per cent of shareholders this season, reflecting the increasing activism of investors.